The China bubble even has Anthony Bolton fooled

Does China have a bubble problem? Of course it does. We’ve written here several times about how 10% growth a year is unsustainable; about the obvious property bubble; and about how the Chinese authorities appear to have lost control of monetary policy.

So I was interested to see GMO’s Edward Chancellor writing on the subject in the FT yesterday. Seems he is pretty convinced as well. All great bubbles, he says, have easy money and growing leverage. They reflect George Soros’ theory of ‘reflexivity’, whereby their markets are determined by “a two-way feedback” in which reality helps shape the participants’ thinking process and the participants’ thinking helps shape reality. They end up in a situation where “already-inflated asset prices can only be sustained by further price appreciation and ever-increasing leverage”. And – as we always find out in the wake of their collapses – they are “accompanied by fraud”.

China currently shows all the symptoms of a great bubble. Construction accounts for around 25% of economic activity and “the anticipation of future Chinese economic growth drives new construction while new construction drives economic growth”. That’s reflexivity at work.

But can it last much longer? People assume that property prices will rise indefinitely – because they have so far. But “the newly constructed apartments in many Chinese cities are unaffordable to anyone but the rich elite, speculators have acquired millions of apartments that are currently sitting empty, while a glut of new supply is set to hit the market this year”. Bubbles continue “until the misperceptions of investors are so glaringly obvious they can no longer be ignored”. That can’t be long now.

I’d give you one more thing – Anthony Bolton. Bolton has long been known as Britain’s most successful value investor, a man who apparently never compromised his investment principles when he was based here. These days he runs a fund in China. And according to Money Marketing he doesn’t invest the same way there. Sure he looks for cheap companies but he also buys “firms which are growing more strongly but have fuller valuations.” He tells the mag that he “would have been less willing” to buy this kind of stuff when he was investing in Europe “but that he has to make allowances for differences in the Chinese market.”

Oh dear. At the beginning of his column Chancellor takes a swipe at investors who “entranced with China’s apparently glorious prospects” ignore the dangers posed by its bubble. They think China is different. But it probably isn’t: so far history has made it pretty clear that all speculative bubbles are pretty much the same.

7 Responses

  1. 09/02/2011, Alex wrote

    Few people ever seem to consider Chinas demographics, thanks to the one child policy it’s going to have the worlds most rapidly aging poplution very soon. Who is going to buy the apartments, catch the high speed trains, or staff the army in a geriatric China?

    It is having it’s moment in the sun, but I think compared to the USA, South America, or even India I think it will be suprisingly brief.

  2. 10/02/2011, Bernie wrote

    House prices are already starting to fall, or least not rising much anymore, as a matter of fact shenzhen housing is already recording a drop for the 3rd month already in many of its estates.

    Many Jobs wages after doubling still faces labor shortage.

    Most Chinese speculators pay by 100% cash, but I agree the developers will be the trouble.

    The stock market remains one of the world’s most depressed.

    There might be specific bubbles like property, which unlike the bubbles in the west, many of the speculative properties in China are not based on debt also wage levels are now rising at a much faster rate that anyone would imagine just a year ago.

  3. 10/02/2011, Bernie wrote

    If the property market crashes I can hardly see any spill over effect to the whole economy like what the west just experience. On the other hand any crash in the property market should be welcome as the citizens might just finally let loose of their purse and start spending money on “other” things and services & give more life to the retail industry.

    @ Alex. There are so many ways to by pass the OCP. If you rich, buy your 2nd kid a ID. If you are not that rich but not poor, take a short trip to Hong Kong, Macau, or even Thailand, where you give birth to your second child and then bring them back to China, (not to mention then those born let say in HK will also get HK citizenships), if you are poor some places in China do let you have 2 or more kids to keep social tension down, some just simply give birth to the second child and not registering that second child so as a result there are perhaps a few million people roaming around China with no registration aka they do not exist

  4. 10/02/2011, Bernie wrote

    Older China might just be what it needs to calm the whole country down in IMO so it might be a pretty good thing, and it also means a perfect investment theme for related industries. Not to mention most of the wealth lies with the elderly not the kids that splashes them on LV Bags. Eg. Li Ning has done terrible lately because they decided to switch their target to younger ones, which they succeed in taking market share, but had to pay a deer price for abandoning the silver gen customers.
    I just don’t see a Chinese bubble, but I do see Chinese specific bubble, Developers, Auto & Banking. But I still find potential on health care, supplement, retail, fertilizers producers, vegetable growers, consumer staples, water engineering, etc. If the property market collapse, I will be even more bullish on these sectors.
    I wouldn’t invest in ICBC or COL, but I will invest in Embry form – a Hong Kong Bra Maker which has the biggest market Share in China.
    Well just my opinion.

  5. 11/02/2011, dandelion wrote

    No worry, the punters in the East predict a miserable first half and strong recovery in the second half this year. China economy is firmly state-controlled.

    Just imagine the momentum of the Chinese people if their productivity is not rewarded. The vibrancy of their commerce will continue.

    Rock on, China fund

  6. 16/02/2011, C Park wrote

    Tis a bit harsh on Mr Bolton. I’m sure he hasn’t forgotten his investment principles, but given how blown up the bubbles are in China, if he followed them then he would have nothing invested at all. Pretty hard to sell a fund with toppy fees when all you’re holding is cash.

  7. 16/02/2011, IJ wrote

    Yeah, MSW does seem to have it in for Anthony Bolton. I can understand when it’s over fees, but am not so sure it’s fair on the investment front. May I also point out that being bearish on China is pretty consensual right now. The market has been a poor performer for a while, so maybe Bolton can in fact pursue a contrarian value-based approach and find some bargains. Bernie’s points are very valid. The leverage levels in China are nothing like what we’ve seen in the West and the government has $2 trn or whatever it is in reserves, so plenty of ammunition for bail-outs. I have no doubt China will hit a wall at some stage, but feel the bears are too early.
    @Alex – why is India’s rising population in an environment of commodity and food price inflation a GOOD thing?

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